Alternative fuels and technologies Policies for successful introduction Bas van Bree, Ingo Bunzeck Energy research Centre of the Netherlands (ECN) Unit Policy Studies Brussels, 1 March 2011

Alternative technologies and fuels face barriers on their way to the market Market share How can policy stimulate the introduction of alternative fuels and technologies in passenger road transport? Commercialisation LPG Early market CNG 1st gen Biofuels Demonstration R&D HEV PHEV H2FC EV 2nd gen Biofuels Time

Alter-Motive Work packages WP1: EEG Management WP2: EEG Review of historical developments WP6: EEG Deriving scenarios and Action plan WP3: BSR Technology and fuel assessment WP7: KISE Communication & Dissemination WP8: EEG Common Dissemination activities WP4: FGM-AMOR Development and analysis of case studies WP5: ECN Evaluation of policy effectiveness

Fiscal policy is the main policy instrument creating a playing field 17 EU countries have implemented CO2 differentiation in taxation There is evidence that fiscal policy affects: Car ownership Car use CO2 emissions [Nordisk Ministerråd, 2008] Source: ACEA Pocket Guide 2010

In current fiscal policy (in NL), tariffs differ per fuel Alternative fiscal policies could possibly help to provide a more level playing field In current fiscal policy (in NL), tariffs differ per fuel A more level playing field is possible, e.g. by using WTW emissions as a basis This does not ensure competitiveness of alternative fuels Dutch registration tax as function of CO2 emissions Diesel Petrol LPG exemption

Barriers are technology-specific and phase-dependent R&D Demonstration Early markets Commercialization Electric vehicles Battery safety Unknown user behaviour High vehicle price Availability of rare metals Biofuel blends Fuel prod. cost (feedstock) Lack of standards Feedstock availbility LPG Filling station coverage Time » Specific policy package per fuel required «

Barriers are technology-specific and phase-dependent R&D Demonstration Early markets Commercialization Electric vehicles Battery safety Unknown user behaviour High vehicle price Availability of rare metals Biofuel blends Fuel prod. cost (feedstock) Lack of standards Feedstock availbility LPG Filling station coverage Time » Policy package needs to be adapted over time «

Policy objectives, success factors, effectiveness measures depend on innovation phase R&D Address technological issues Focus Mass Investment # completed projects Demo Involvement key players Coordination Early market Increase market share Strong incentives Removal other barriers Market share Mass market Competi-tiveness Competitive price Enforceable obligations No more (costly) support POLICY OBJECTIVE KEY SUCCESS FACTORS demonstration, objective: also prove business case mass market 1) cost reductions result in competitiveness 2) obligation divides costs in reasonable way mass market: no more costly support, but market share remains two examples: biofuels & EVs biofuels -> early market EVs -> demonstration (entering early market) EFFECTIVE- NESS MEASURE

Biofuels Biofuels are in the early market phase Key policies are tax reductions and obligations

Tax exemptions have not been equally effective in all countries Biofuels Tax exemptions have not been equally effective in all countries possible explanations 1) other policies (but not for costs!) 2) consumer preferences (different elasticities in different countries) Sources: Kutas et al. (2007), ACEA, IEA

Biofuel policy in Germany proved too expensive Biofuels Biofuel policy in Germany proved too expensive

Biofuel policy in Germany proved too expensive Biofuels Biofuel policy in Germany proved too expensive Lost tax income in 2006: 4.7% Tax exemption replaced by obligation

Government (i.e. all taxpayers) pays Biofuels Main issue for biofuels is who should bear costs in anticipation of the (cheaper) 2nd generation Major barriers Fuel cost relative to conventional Minor barriers Vehicle cost premium Dedicated infrastructure Policy recommendations Tax break (or subsidy) Obligation only for high blends Government (i.e. all taxpayers) pays Motorists pay

To overcome the ‘blend wall’ additional measures are required Biofuels To overcome the ‘blend wall’ additional measures are required Major barriers Fuel cost relative to conventional Minor barriers Vehicle cost premium Dedicated infrastructure Policy recommendations Tax break (or subsidy) Obligation Need to anticipate future developments only for high blends market for high blends may develop by itself (although kick start is required)

EVs Electric vehicles are in the demonstration phase Countries are taking strategic positions R&D expenditures (2009) Demo expenditures (2009) Early market expenditures (2009) Amounts include tax exemptions (registration & ownership) Note: The expenditures of the British and Dutch R&D programmes are unknown. Note: Different scales on the vertical axes.

EVs The relative importance of the various barriers for EVs is unclear, but costs will be (very) important Barriers Battery capacity Unknown user behaviour Vehicle cost Lack of charging infrastructure Vehicle model availability Policy recommendations Measures to address barriers in all phases Appropriate mix depends on local circumstances & on insights from ongoing research

EVs Different barriers become important in different phases of the innovation process Barriers Battery capacity Unknown user behaviour Vehicle cost Lack of charging infrastructure Vehicle model availability Policy recommendations Measures to address barriers in all phases Appropriate mix depends on local circumstances & on insights from ongoing research R&D Demo Early market

EVs Different barriers can be solved in different phases in the innovation process R&D: Techn. development Demo: Fast charging, battery swapping EM: User behaviour Barriers Battery capacity Unknown user behaviour Vehicle cost Lack of charging infrastructure Vehicle model availability Policy recommendations Measures to address barriers in all phases Appropriate mix depends on local circumstances & on insights from ongoing research R&D: Techn. development EM: Battery leasing EVs can move into early market phase without solving all barriers due to - use of existing infrastructure - possibility to deal with technological limitations by ‘early adopters’ Need for measures (R&D, demo) simultaneously General expectation that first volumes (which will generate cost reductions) will require government support (‘kick start’)

Policy measures can serve to… Conclusions Technology-specific measures are needed to address technology-specific barriers Policy packages need to ‘follow’ the development of a technology over time Policy measures can serve to… …trigger ‘learning-by-doing’ …‘kick start’ a market (which does not ensure a lasting market) Effectiveness depends on providing a good incentive, including the creation of a solid investment perspective future research 1) differences in policy effectiveness (e.g. biofuels tax exemptions): consumer preferences, entrepreneurship, combination with additional policy, … 2) differences in elasticities for fuels, countries, etc.

Thank you for your attention! Ingo Bunzeck bunzeck@ecn.nl Bas van Bree vanbree@ecn.nl

Acknowledgment ALTER-MOTIVE is funded by the European Commission within the Intelligent Energy Europe Programme contract IEE/07/807/SI2.499569

ALTER-MOTIVE: Has the wheel already been invented? BACKUP SLIDES

Biofuels Biofuel policy in the UK did initially not provide a sufficiently strong incentive

Sweden has a very comprehensive policy to stimulate biofuels

French biofuel policy limits budget impact, but also market shares Biofuels French biofuel policy limits budget impact, but also market shares

CNG CNG is on the brink of commercialization Low taxation is combined with additional measures

CNG CNG is on the brink of commercialization Low taxation is combined with additional measures Mainly biogas

Example: Germany slowly but steadily increases CNG market share Main instruments: low taxation & vehicle subsidies Some incentives to stimulate infrastructure buildup New vehicle model introductions have significant impact Cost advantage: €0,57/lt petrol-equiv €0,23/lt diesel-equiv

All major barriers: chicken-egg dynamic CNG Low taxation is a key policy, but needs to be complemented by other measures All major barriers: chicken-egg dynamic Major barriers Fuel costs relative to conventional fuels Vehicle model availability Dedicated infrastructure Minor barriers (none) Policy recommendations Tax break Investment subsidy Covenants with industry Provide favourable investment perspective

LPG LPG is a mature technology and can be stimulated by tax reductions only Eastern Europe: cheap conversion

LPG market share increase in France was triggered by tax measures

LPG market share in Poland has been in decline in recent years

LPG market share has been in decline for several years

LPG requires a significant discount over conventional fuels Major barrier Fuel costs relative to conventional fuels Minor barriers Vehicle conversion costs Dedicated infrastructure Policy recommendations Tax break (or subsidy)

LPG does not require specific policies for infrastructure buildup Major barrier Fuel costs relative to conventional fuels Minor barriers Vehicle conversion costs Dedicated infrastructure Policy recommendations Tax break (or subsidy) If fuel costs are sufficiently low, the market will take care of infrastructure buildup.

Hydrogen faces major barriers that relate to a chicken-egg dynamic Vehicle cost Infrastructure Vehicle model availability Policy recommendations Cooperation with industry (PPP, covenants) Tax breaks & subsidies (vehicles & fuel) Investment subsidy & accelerated depreciation chicken-and-egg more severe than for CNG (risk)

EU unlikely to fund early market Hydrogen National policies are likely required to help hydrogen in the early market phase Barriers Vehicle cost Infrastructure Vehicle model availability Policy recommendations Cooperation with industry (PPP, covenants) Tax breaks & subsidies (vehicles & fuel) Investment subsidy & accelerated depreciation EU unlikely to fund early market chicken-and-egg more severe than for CNG (risk)